Boyd Gaming Corporation — Q3 2018 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017. Boyd operated 25 wholly owned gaming properties across eight states, reported in Las Vegas Locals, Downtown Las Vegas, and Midwest & South segments.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $612.2 | $591.5 | $1,835.1 | $1,805.7 |
| Operating income | $69.6 | $78.9 | $260.6 | $263.3 |
| Net income | $11.8 | $23.2 | $92.2 | $107.3 |
| Diluted EPS | $0.10 | $0.20 | $0.80 | $0.93 |
| Adjusted EBITDA | $148.7 | $140.5 | $472.6 | $447.7 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $332.2 | $333.4 |
- Revenue increased 3.5% in Q3 and 1.6% year to date. Gaming revenue grew 4.2% in Q3 and 1.9% year to date; Midwest & South was the principal growth driver, including acquired operations.
- Operating margin was approximately 11.4% in Q3 versus 13.3% a year earlier, and 14.2% year to date versus 14.6%. Adjusted EBITDA margin was approximately 24.3% versus 23.8% in Q3 and 25.8% versus 24.8% year to date.
- Q3 net income fell 48.9%; year-to-date net income fell 14.1%. Continuing-operations income was $11.8 million in Q3 versus $23.2 million, but rose to $91.8 million year to date from $85.9 million. Prior-year nine-month net income included $21.4 million from discontinued operations, mainly Borgata-related proceeds.
- Departmental margins: gaming 55.8% Q3 / 56.5% year to date; food and beverage 4.4% / 4.8%; rooms 53.5% / 55.3%. Food and beverage margins improved from 2.4% / 2.9% in the comparable periods.
- Cash and cash equivalents were $441.0 million, with restricted cash of $33.6 million. Current assets were $582.1 million and current liabilities $425.9 million.
- Debt principal was $3.602 billion at September 30, up $480.4 million from year-end 2017. The company had $932.8 million of remaining revolving-credit availability after letters of credit. Nine-month cash interest paid was $107.8 million.
- Nine-month investing cash outflow was $485.6 million, including $367.3 million for acquisitions and $107.6 million of capital expenditures. Maintenance capital spending is estimated at $140–$160 million annually, excluding acquired properties and incremental projects.
Material changes and significant events
- Boyd completed its acquisitions of Lattner, an Illinois distributed-gaming operator, on June 1 for a stated net purchase price of $100.7 million, and Valley Forge Casino Resort on September 17 for $266.6 million. Acquisition accounting remained preliminary; Valley Forge included $5.8 million revenue and $0.8 million net income from September 17–30.
- On October 15, after quarter-end, Boyd completed the acquisition of four Pinnacle-related properties for net cash consideration of $569.9 million, subject to closing adjustments. The transaction included a master lease for certain facilities with an initial term through April 30, 2026. Initial purchase accounting was incomplete.
- Boyd issued $700 million of 6.000% senior notes due 2026 in June, at a 6.000% coupon. Proceeds were used to reduce revolving and swing-loan balances, fund Valley Forge, and retain cash and short-term investments. The weighted-average interest rate on total debt increased versus the prior year.
- Q3 project development, preopening and writedown expense rose to $18.6 million from $3.0 million; nine-month expense was $27.8 million versus $8.7 million. Drivers included acquisitions, Wilton Rancheria development, the redesigned BConnected loyalty program and preparation for the Pinnacle-property transaction.
Management commentary, outlook and risks
- Management attributed EBITDA growth to acquisitions, revenue growth, marketing refinements and operating efficiencies. The 2017 comparison was affected by Hurricane Harvey, which disrupted certain Louisiana and Mississippi properties.
- Management said operating cash flows and available credit were expected to meet liquidity needs for the next 12 months, including projected operating and maintenance capital expenditures. No specific revenue, earnings or EBITDA guidance was provided.
- The effective tax rate for continuing operations was 23.6% for the first nine months, versus 35.7%, primarily reflecting the Tax Act’s reduction of the federal corporate rate; the company said its Tax Act accounting analysis was substantially complete.
- Risks highlighted include gaming competition and regulation/taxation, acquisition integration and execution, project delays or cost overruns, economic or severe-weather disruptions, refinancing and interest-rate exposure, and cyber/data-integrity risks. Variable-rate borrowings were 38.9% of long-term debt; a 100-basis-point rate change was estimated to affect annual interest cost by approximately $14 million.
- Management reported compliance with debt covenants, effective disclosure controls, and no material change in previously disclosed risk factors. It stated ordinary-course legal claims were not expected to have a material adverse effect.
- The company planned to adopt the new lease standard in 2019 and expected a significant balance-sheet impact from recognizing lease assets and liabilities, with likely insignificant effect on the income statement.
Investor verification priorities
- Assess the economics, financing, lease obligations and integration progress for the October 2018 Pinnacle-property acquisition, including final purchase accounting and closing adjustments.
- Reconcile debt growth, interest expense and available liquidity after the acquisitions; review the new notes’ covenants and variable-rate exposure.
- Separate underlying same-property performance from acquired-property contributions, Hurricane Harvey comparisons and acquisition-related expenses.
- Review the sources of higher project development costs and the status, financing and timing of the Wilton Rancheria project.
- Consider the effect of the 2018 revenue-standard retrospective presentation when comparing periods with older filings; the filing states prior periods were adjusted.